• The RBI had embarked on the Asset Quality Review (AQR) exercise from December 2015 and had set a deadline of March 2017 to complete the exercise.
  • As part of it, RBI had asked banks to recognise some top defaulting accounts as non-performing assets (NPAs) and make adequate provisions for them.
  • Under ‘Indradhanush’ roadmap announced in 2015, the Union Government had announced an infusion of Rs. 70,000 crore in state-run banks over four years.
  • Banks also were allowed to raise a further Rs. 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, Basel-III.
  • In line with the plan, PSBs were given Rs. 25,000 crore in 2015-16, and a similar amount was earmarked for the current fiscal 2016-17. Besides, Rs. 10,000 crore each will be infused in 2017-18 and 2018-19
Do you think Indradhanush, a seven point programme to rejuvenate public sector banks (PSBs), will be able to provide a competitive, profitable and customer-friendly banking sector? Critically examine. (200 Words)
Recently the govt. launched Indradhanush, a 7 point program to rejuvenate the public sector banks. Through this program the govt. aims to:
  1. Better senior appointment
  2. Establishment of BBB (Bank board bureau)
  3. Pump more capital
  4. Reduce bad loans
  5. Empower management
  6. Improve accountability
  7. Better governance
Positive aspects of Indradhanush:
  1. Would curb increasing NPA. Currently they have increased to 4.5% of GDP.
  2. Would ensure better focus on recruitment, appointment, accountability and governance.
Challenges: But there are some reasons to be skeptical about Indradhanush:
  1. High on platitudes: Improve accountability, better governance, empower management are platitudes mentioned by every committee. No specific measures have been specified to achieve these objectives
  2. Half measures: even after many recommendations, govt. has not diluted its stake below 50% even when it can easily maintain a majority share.
  3. External dual control: Dual control of RBI and finance ministry is the source of many problems but no effort has been made to address this. Also external vigilance by CVC and CBI has affected risky decision making.
  4. Failure to streamline RBI role: Dept. of banking supervision and dept. of banking regulation have failed to control NPA or to create a competitive banking sector.
  5. BBB has 2 govt. officials and RBI governor. Thus, it would be difficult to ensure independent appointments.
  6. Disinvestment has not been talked about. Reducing govt’s stake is key to banking reforms. Infusing capital will increase stake of govt.
  7. Help to PSBs through capital will not ensure level playing field for private sector banks.
  8. Places too much importance on market to raise capital. It is very time taking as the PSBs do not enjoy confidence.
  9. While the senior appointments have been addressed well, what about the midlevel and  junior bank officials? execution of policies are in their hand. They were not addressed in this project.
  10. Further addressing the issue of Non-performing assets failed to explain how the system of fast approval and clearance for big infrastructure projects would be done. the project did not discussed about any effective mean to monitor and regulate bad loans or training of banking officials which is highly recommended in order to update the work force.
Thus though the Indradhanush is hopeful to create a hopeful or customer friendly banking sector, as long as these challenges are addressed, this novel initiative would become another effort, lost in pages of history.
Indradhanush 2.0
  • Indradhanush 2.0 will be finalised by Reserve Bank of India (RBI) after completion of Asset Quality Review (AQR) which is likely to be completed by end of March 2017.
  • It aims to clean up the balance sheets of PSBs to ensure banks remain solvent and fully comply with global capital adequacy norms, Basel-III.
CAG report on Indradhanush:
  • According to a report by the CAG, the Centre’s ‘Indradhanush’ scheme to recapitalise public sector banks (PSBs) based on their performance was not implemented in a manner envisaged.
  • As per the scheme, a portion of the recapitalisation was to be based on the bank’ performance. However, this was not followed during disbursal of funds.
  • The parameters used to determine whether banks required capital changed from year to year and in some years the rationale for capitalising banks was not even recorded. Hence, the scheme’s target of raising Rs. 1.1 lakh crore from the markets by 2018-19 was not likely to be met.
  • Also, some banks that did not qualify for additional capital as per the decided norms, were infused with capital, and in some cases, banks were infused with more capital than required

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